Understanding & Managing Environmental Impacts

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> A comprehensive database of the environmental impacts of over 4200 global public companies (and a growing number of private companies)

> Up to 8 years of history on the companies & industries we’ve been tracking during our 10 years of operation

> Thought leaders

Proprietary and Confidential P3

Environmental Impacts

Source: UK Government Environmental Reporting Guidelines

Trucost Evaluation Process

Financial AnalysisSegmental Analysis

Initial ProfileDisclosures and Public Registers

Direct and Indirect Impacts

External Cost Profile

Breakdown the company’s financial results

Identify the activities that the company performs and assign costs and percentages

Produce a modelled profile of the company with quantities of resources and emissions

Analyze company disclosures and public registries for actual impact data and incorporate if adequate

Analyze emissions and resource usage by the company and its supply chain

Apply external prices to the resources and emissions to allow comparison on a variety of issues

Trucost Evaluation Process – Phase 1

Trucost Input-

Output Model

Valuation

Studies

Generate ReportSend Report to

CompanyIncorporate Feedback

Review with New Disclosures

Produce one page Company Briefing as the information is entered into the calculator

Send a copy of the report to the company for their verification or enhancement

Analyze any feedback received from the company and incorporate it if comprehensive and consistent

Monitor the public domain for any new environmental disclosures that the company makes throughout the period

Company Verification Process

Greenhouse Gas Data• Standardized data so companies can be accurately compared

• Broken down into Scope 1, 2 & 3

• Represented as absolute figures (tons) and intensity (%)

Newsweek 2010 Green Rankings: OverviewNewsweek 2010 Green Rankings: Overview

• Newsweek Green Ranking of 500 largest U.S.and 100 largest Global companies

• First systematic evaluation by a leading U.S. news publication of the overall environmental performance of large U.S. and Global firms

• The goal of the rankings was to assess each company's actual emissions, resource use, environmental policies and strategies, and green reputation among its peers.

• The company Environmental Impact Scores are calculated from data provided by Trucost and accounts for 45% of the ranking

Newsweek 2010 Green Rankings: DataNewsweek 2010 Green Rankings: Data

Overall Environmental Profile – Includes 700+ granular data points

Key metrics provided by Trucost for each of the NWGR companies:

Environmental impact intensity and adequate disclosure of:

•Greenhouse gas emissions

•Water use

•Acid rain precursor emissions

•Solid waste disposed

• 42% of the companies in the second annual US 500 rankings actively provided feedback and data, as did 45% of the companies in the inaugural Global 100 rankings. 

• 52% of the companies in the US 500 rankings disclosed some environmental performance data, as did 83% of the companies in the Global 100. 

• High degree of engagement and interest in benchmarking/peer assessment following Newsweek 2010 Green Rankings launch in October

Newsweek 2010 Green Rankings: ResponseNewsweek 2010 Green Rankings: Response

“A couple weeks ago, when about 30 senior sustainability executives gathered in Milwaukee for a meeting of our GreenBiz Executive Network, I asked members how many knew their company's 2009 Newsweek Green Ranking. Damn near every one could cite it blindly. The rankings, it seems, have become a major metric in corporate America.”

- Joel Makower, Editor GreenBiz

Newsweek 2010 Green Rankings: ResponseNewsweek 2010 Green Rankings: Response

Newsweek 2010 Green Rankings: US ResultsNewsweek 2010 Green Rankings: US Results

Newsweek 2010 Green Rankings: Global ResultsNewsweek 2010 Green Rankings: Global Results

• Perhaps unsurprisingly greenhouse gas emissions (GHGs) are a major contributor to the total environmental impact for most companies.

• GHGs account for between a quarter and two-thirds of the total environmental footprint of Green Ranking companies' depending on the business sectors they operate in.

• Water use has been receiving much more attention recently from companies and investors alike including work from Ceres, the CDP, from companies (also see recent reports from both Coca Cola and PepsiCo) and the UNPRI conducted by Trucost .

• As a source of environmental impact, water deserves this increasing attention, in the Green Rankings, at least 10% and up to 60% of the environmental impact came from water.

Together greenhouse gas emissions and water use contribute an average of 70% of the total environmental impact of companies included in the 2010 Green Rankings.

Newsweek 2010 Green Rankings: ResultsNewsweek 2010 Green Rankings: Results

Newsweek Top 100 Equally Weighted

Newsweek 2010 Green Rankings: PerformanceNewsweek 2010 Green Rankings: Performance

The Green Rankings methodology was created in consultation with an advisory panel convened by Newsweek.

•John Elkington - Executive chairman of Volans and cofounder of SustainAbility

•Daniel Esty - Hillhouse professor of environmental law and policy at Yale University

•Marjorie Kelly - Senior associate at the Tellus Institute and cofounder of Business Ethics

•Tom Murray - Managing director at the Environmental Defense Fund’s corporate partnerships program

•Wood Turner - Executive director of Climate Counts

•David Vidal - Research director of global corporate citizenship at the Conference Board

•Deborah Wince-Smith - President and CEO of the Council on Competitiveness

Newsweek 2010 Green Rankings: Advisory PanelNewsweek 2010 Green Rankings: Advisory Panel

P15

UN Report on Ecosystems Valuation & the world’s largest investors

The initial analysis of the top 3000 public companies shows:

– US$2.2 trillion in environmental costs were caused by the largest 3,000 listed companies in 2008 – out of over US$6T in total damage costs from all human activity. Public companies account for over 1/3 of the total annual global environmental costs. Other elements of the economy, such as other public and private companies, governments, universities and consumers contribute the remaining externalities. For many of these organizations, externalities largely come from their supply chains.

– Our report estimates the value of external environmental costs at 10% of global GDP (issues include GHGs, Water, Forestry, Fisheries, Air Pollution) short term, heading up to 15-20% of GDP in the medium term

– The cost of pollution and other damage to the natural environment caused by the world's biggest companies would wipe out more than one-third of their profits if they were held financially accountable

Components of Valuation

Direct Use Values

• Direct use values are values derived from direct use or interaction with ecosystem resources and services. They involve both commercial, subsistence, leisure, or other activities associated with a resource. Subsistence activities are often crucially important to rural populations.

Indirect Use Values

• Indirect use value relates to the indirect support and protection provided to economic activity and property by the tropical forest’s natural functions, or regulatory environmental services. For example, the watershed protection function of a tropical forest may have indirect use value through controlling sedimentation and flood drainage that affect downstream agriculture, fishing, water supplies and other economic activities. The microclimate function of some tropical forests may also have indirect use value through the support of neighbouring agricultural areas. If the environmental functions and services provided by the forest are disturbed, then there will be a corresponding change in the value of production or consumption of the activity and property that is protected or supported by the forest. As indirect values cannot, typically, be directly or indirectly inferred from observed human or market behaviour, they are often difficult to value.

Option Value

• Option value is a type of use value in that it relates to future use of the tropical forest. Option value arises because individuals may value the option to be able to use a tropical forest some time in the future.

Non-use Value

• Non-use values are derived neither from current direct nor indirect use of the tropical forest. There are individuals who do not use the tropical forest but nevertheless wish to see it preserved in their own right. These intrinsic values are often referred to as existence values. Existence value is derived from the pure pleasure in something’s existence, unrelated to whether the person concerned will ever be able to benefit directly or indirectly from it. Existence values are difficult to measure as they involve subjective valuations by individuals unrelated to either their own or others use, whether current or future. However, several economic studies have shown the existence value of tropical forests to constitute a significant percentage of total economic value.

P17

Summary findings

An initial analysis of aggregate externalities as they apply to the top 3000 public companies:

43%

27%

18%

4%

3% 3% 2%

Greenhouse Gases

Water Abstraction

Other Emissions

Natural Resources

VOCs

General waste

Heavy Metals

Environmental Impacts Tracked

Over 750 different environmental pollutants / damaging activities

– Sink Air – Acid rain precursors, Greenhouse gases, Heavy Metals, Ozone Depleting Substances Pesticides, Smog precursors, Volatile Organic Compounds (VOCs)

– Sink Land – Acid Rain Precursors, Fertiliser residues, General Waste, Heavy Metals, Nuclear Waste, Ozone Depleting Substances, Pesticides, Volatile Organic Compounds (VOCs)

– Sink Water – Acid Rain Precursors, Fertiliser residues, General Waste, Heavy Metals, Nuclear Waste, Ozone Depleting Substances, Pesticides, Volatile Organic Compounds (VOCs)

– Source Land – Crude oil, Natural gas, Coal, Metals, Minerals, Stone, Timber, Agricultural products, Water abstraction

– Source Water – Botanical, Zoological

Environmental KPIs (Key Performance Indicators)

• The Top 7 environmental KPIs are GHGs, of which Trucost tracks 9 separately, as well as Water Abstraction & Use, Volatile Organic Compounds, Acid Rain & Smog Precursors, Natural Resource Use, Heavy Metals and Waste

Environmental Footprint Management

• Universities – Michigan State

• Public & Private Companies – Sprint Nextel

• A current White House Executive Order, requires all US government agencies including EPA are needing to demonstrate an understanding of their carbon footprint ( + other public sector entities globally including NHS Trusts in the UK)

• Cities & Municipalities - London and its boroughs

• Countries & Regions

• Investors

London Councils : BackgroundLondon Councils : Background

For Local Authorities carbon emissions embedded in the supply chain far exceed the emissions for which or they are directly responsible.

London is the world’s first region to undertake a full carbon analysis and engagement programme with its supply chain. The broad objectives are as follows:

• Identify Efficiency & Cost Savings• Risk Management

• Compliance• Leading Practice

‘If you want to work with the world’s best companies you must account for your embedded (supply chain) carbon. If we contract with people who have no interest in this, why are we contracting with them when they have no regard for the single most important issue facing mankind’.

Neil Hart – Head of Environment, Rolls Royce

Project Rationale Project Rationale

Savings Potential: Structured and comprehensive measurement and monitoring of supply chain emissions identifies cost-saving opportunities.

Compliance: Inform the operational delivery of your strategic commitments to sustainable procurement (the Flexible Framework), climate change, energy consumption and local economic development.

Risk Management: Identify efficiency savings from enabling suppliers to understand the cost benefits from leaner use of resources and reduction of waste in existing products and processes.

Improved ability to identify strategic supply risks to long-term continuity and cost of supply for key items, and the council’s ability to respond.

Identification and avoidance of risks to reputation and media exposure. How might expenditure patterns or contract management procedures be changed to reduce exposure?

Summary figuresSummary figures

Initial Analysis :

Total spend is £7.8 Billion equates to 45,084 aggregated transactions.

90% of the total spend is 18,200 aggregated transactions with 10,500 unique suppliers (All transactions which are greater than £87,900.00 on average)

Total Carbon Footprint of London’s Public Procurement: 2.7mn tCO2-e (larger than many entire countries!)

Average Carbon Intensity: 361 tCO2-e per £mn

Significant intensity variances between Boroughs: ‘Best’ performer at 174 tCO2-e per £mn; ‘Worst’ performer at 713 tCO2-e per £mn

The Initial Hot Spot Report – LB’sThe Initial Hot Spot Report – LB’sThese Reports for each Borough have now been circulated.

They are based on modelled data only but allow us to identify initial Hot Spots within the supply chain, both in terms of sectors, suppliers and apportioned by spend.

This report will then be refined post engagement with more physical data to establish the divergence amongst similar suppliers.

Supplier EngagementSupplier Engagement

Supplier EngagementThe engagement part of the project involves capturing more site level physical and disclosure data . This will allow us to produce a more accurate environmental profile for each company and also contribute to refining the supply chain footprint.

Engagement ProcessEach supplier will receive via email a detailed training video as well as a letter co-authored by Capital Ambition / Trucost / The bodies asking them to participate in the engagement process.

Engagement SupportThe Trucost Research team and engagement team will focus on contacting suppliers individually in order of spend and carbon intensity. This exercise will increase the response rate and also try and collect better quality data.

Supplier ReportsSupplier ReportsThese reports are being sent to all 5,000 suppliers (those that are within 90% of the carbon emissions for all LBs)

These reports can be used by each supplier to begin to understand their carbon footprint and potentially manage that footprint. These reports can also be used in responding to tenders which require a carbon footprint measurement.

If a supplier provides more detailed data then through the engagement Trucost will provide them with updated reports.

Detailed AnalysisDetailed AnalysisDistribution of Carbon throughout the supply chain

Supply Chain Analysis ToolSupply Chain Analysis Tool

This tool will be delivered to every body within the project. It will be pre-populated with all the supply chain emissions data relating to the expenditure of that body.

The tool can be used to identify sectors and also suppliers that are large contributors to a bodies supply chain emissions.

Using the data analysis tables a strategy if either engaging with the supplier or switch suppliers can be formulated.

The tool provides CSR officers an ongoing carbon measurement tool to map ongoing expenditure to supply chain emissions

The tool can also be used to establish reduction targets via the scenario analysis calculation.

Waltham Forest PCTSupply Chain FootprintFinal Results

Next StepsNext Steps

Sample Data: Body Level EmissionsSample Data: Body Level Emissions

Allows the comparison of individual council with each other within a region, these are carbon

intensities

Questions and Next Steps Questions and Next Steps

Use supplier data to inform procurement process

Establish continuous improvement cycle for suppliers

Encourage suppliers to engage and consider their carbon footprint

London Borough of GreenwichSupply Chain Carbon FootprintFinal Results

Category level Emissions : Body LevelCategory level Emissions : Body Level

Category level emissions for an individual council as compared to the average of all councils (tracer

line)

Supplier Level Analysis : Top PollutersSupplier Level Analysis : Top Polluters

Top 20 polluters based on physical tonnes of GHGs per 1 £mn of

expenditure with that supplier

Supplier Carbon Footprint : GHG ScopesSupplier Carbon Footprint : GHG Scopes

Scenario Analysis : Reporting on Reduction TargetsScenario Analysis : Reporting on Reduction Targets

Set a reduction target for carbon intensive categories

Scenario ResultsScenario Results

Forecast total supply chain carbon reduction

based on these category level reduction targets

Proprietary and Confidential P34

The environmental benefit model is the compilation and evaluation of inputs, outputs and the environmental impacts associated with a product, process, or activity which includes the identification of energy, materials and substances used and emissions and wastes released to the environment, over the established life cycle of the product, process or activity.

Environmental Benefit Model – The Trucost Process

Raw Materials Fuels/Energy

Emissions to Air Waste Emissions to Water

Water

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Past performance is not necessarily indicative of future results.

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Jul-04Sep-04Nov-04Jan-05Mar-05May-05Jul-05Sep-05Nov-05Jan-06Mar-06May-06Jul-06Sep-06Nov-06Jan-07Mar-07May-07Jul-07Sep-07

Stoxx600 CO2 WeightedStoxx600 Benchmark

European Carbon Optimised (ECO) STOXX 600 launched Q1 2008

Sector neutral

Buys every company in the index and re-weights company within the sector by relative carbon efficiency

Risk averse strategy with significant carbon savings in a region specifically affected by new and pending regulation and customer demand

0.7% tracking error

39% carbon savings

UBS ECO – Carbon Optimized

DJ Stoxx 600 Benchmark

DJ Stoxx 600 CO2 Weighted

Annualised Performance 16.7% 17.1%

Annualised Realised Volatility

8.0% 8.1%

Potential exposure of Utilities and Oil & Gas companies

Company Carbon price £12/tCO2-e Carbon price £57/tCO2-e Cost £m EBITDA Chg Cost £m EBITDA Chg

E.ON AG 1,838 -18% 8,729 -85%RWE AG 2,153 -32% 10,227 -155%Intl Power Plc 811 -83% 3,852 -392%AEP 1,987 -99% 9,439 -471%BP 1,826 -9% 8,673 -44%

* As first appeared in Trucost’s July 2009 ‘Carbon Risks in UK Equity Funds – In-Depth Utilities and Oil & Gas analysis’

What is Sustainability?• Brundtland Commission still the standard, most

relevant definition (early 1980’s – tipping point) : ‘We must find a way to meet our needs without

sacrificing the ability of future generations to meet theirs’

(which means something different for cities, universities, companies & investors)

Sustainable Investing – Columbia/Earth Institute

Univ. of MD Smith School of Business

Students actively participate in the building of a most sustainable portfolio, while reviewing methodologies, metrics, and what hurdles remain for achieving ideal results for all stakeholders. Guest speakers included throughout the course.

(ESGFQ)

Sustainability Imperative – outperformance - book/paper

(+ Columbia class + NWGR+Hawken/Kiernan/DB/GS + SC)

Source: Krosinsky, 2008

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Sustainable Investing MSCI World S&P 500 FTSE 100

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One-year average percentage return (2007)

Three-year average percentage return (31 December 2004 - 31 December 2007)

Five-year average percentage return (31 December 2002 - 31 December 2007)

Sustainable Investing

• First book was the ‘why’ case (Sustainable Investing: The Art of Long term Performance, Earthscan, 2008) – showed outperformance for the more positive branch of SRI

• Second book will feature the ‘how’ (Evolutions of Sustainable Investing, Wiley, 2011) including cases on leading investors and contributions from thought leaders including Esty, Hawken, Fulton, others